HARRISBURG, PA--(Marketwired - December 12, 2013) - State Treasurer Rob McCord, a board member of the State Employees Retirement System (SERS) by virtue of his elected office, today wrote to Governor Tom Corbett, urging the replacement of SERS chairman Nicholas Maiale.
The chairman of the SERS board is appointed by the governor from among the 11 board members. It oversees more than $25 billion in state worker pension funds.
McCord said that recent charges of improper conduct by the SERS chief investment officer, as well as overall management and investment practices at the agency under the current chairman, make changes at the top imperative.
"These charges not only implicate SERS' Chief Investment Officer, but also explicitly include the Chairman of the Board and the process by which investment opportunities are identified and vetted, and also the veracity with which they are presented to the Board for approval," McCord wrote.
The text of McCord's letter follows:
The Honorable Tom Corbett
Commonwealth of Pennsylvania
225 Main Capitol Building
Harrisburg, PA 17120
Dear Governor Corbett:
I write to urge you to make an immediate change in your appointed leadership of the State Employees' Retirement System Board (SERS Board). Recent allegations of possible improper behavior at SERS -- as well as ongoing criticisms concerning Board operations and system management -- make it imperative that you take decisive steps to improve SERS operations and business practices and restore the agency's reputation. While investigations will be needed to determine exactly what occurred and who is culpable, we cannot wait. We know right now that SERS is not operating at an acceptable level, with significant consequences for the integrity of the system and with profound implications for state taxpayers.
As noted on pages 4-5 of a memo distributed to the Board, the allegations originating from SERS employee(s) concerning the investment operations of SERS are both troubling and broad. These charges not only implicate SERS' Chief Investment Officer, but also explicitly include the Chairman of the Board and the process by which investment opportunities are identified and vetted, and also the veracity with which they are presented to the Board for approval. This is an unacceptable circumstance and accountability for it rests at the top. It is clear that a change in Board leadership is overdue.
In addition, the manner by which your Office of General Counsel responded to the receipt of the original allegations falls substantially short of its obligation to the SERS Board -- compromising the Board's ability to execute its fiduciary responsibilities. The Board was not informed by your Office of General Counsel for almost two months after it was presented with the claims of wrongdoing, but instead a law firm was selected, retained, and directed to complete an inquiry without the knowledge or consent of the Board. In addition, even after receiving serious allegations of possible criminal or unethical conduct, the Office of General Counsel waited until December 3rd to inform the Office of Inspector General and to implement protocol actions related to computer-related record preservation.
Exacerbating this troubling situation was the failure of your Office of General Counsel to advise the Board that the allegations may have implicated specific investment proposals that were awaiting Board consideration and approval. Despite my effort to seek additional time for the members of the Board to be fully informed of the scope and seriousness of the allegations as they related to pending investment proposals, the Chairman of the Board pressed for the immediate consideration of all of the proposed allocations on yesterday's agenda totaling $185 million in commitments. It was upsetting to learn, after the Board voted (over my objection) to approve each of the proposed investments, that the allegations may have specifically implicated one of the investment strategies just approved by the Board.
Prudent leadership would have recognized the continued public-policy implications and reputational risk to SERS associated with pushing an investment agenda immediately after the suspension of its Chief Investment Officer and upon being informed of the allegations of possible misconduct involving the consideration, review, and approval of investment proposals. Unfortunately, as a result of the failure of your Office of General Counsel to immediately and fully inform the SERS Board of the allegations, and the unwillingness of the Board's Chairman to forgo delaying any consideration of the pending investment proposals, the Board was permitted to vote on investment decisions that were implicated by the allegations. There is no justification for such conduct. Such actions undermine public and annuitant confidence in the decisions of the SERS Board.
A memorandum to the Office of General Counsel explicitly identified claims that implicate the Board Chairman -- questioning his professional judgment, lack of confidence in his willingness to restrict the Chief Investment Officer's conduct, lack of independence, and desire to advance investment decisions based on political considerations. Though I acknowledge that these claims have not been independently proven, it is worthwhile noting that these claims originate from professional SERS staff and include explicit details.
While the legal and investigatory process can and must be allowed to proceed at its own pace, SERS cannot wait. There is more than enough on the record right now to justify and require a change in the Board leadership you have appointed. This is an opportunity for you to help restore the reputation of the Board by immediately replacing the current Chair and selecting someone with a proven record of independence, transparency, and commitment to restoring public trust.
SERS is presently at a critical crossroad, with a choice -- to continue business as usual and permit the appearance of political considerations and personal relationships to interfere with the fiduciary functions of the SERS Board, or to implement reforms that would foster a new culture of credibility, independence, transparency, and singular commitment to the interest of retired public employees. The stakes are incredibly high -- the performance of SERS is an important public obligation, with direct implications for taxpayers and on the General Fund programs they cherish, including schools, public safety, and job creation. The leadership of the SERS Board has not changed in more than twenty years. Change is overdue.
Robert M. McCord
For more information, visit www.patreasury.gov.